Neonode Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial amounts are in U.S. dollars; financial statement amounts are in thousands unless otherwise noted. Comparisons are with Q1 2019 for operating results and cash flows, and December 31, 2019 for balance-sheet data.
Business context
Neonode develops optical touch and gesture-control technology, sensor modules, and software for automotive driver and cabin monitoring. It reports one operating segment and organized its business areas beginning January 1, 2020 as HMI Solutions, HMI Products, and Remote Sensing Solutions. Remote Sensing Solutions generated no revenue in either comparative quarter.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $1.294 million | $2.012 million | Down 35.7% |
| Gross profit | $1.250 million | $1.911 million | Down 34.6% |
| Gross margin | 96.6% | 95.0% | Up 1.6 percentage points |
| Operating expenses | $2.339 million | $2.579 million | Down 9.3% |
| Operating loss | $1.089 million | $0.668 million | Loss increased |
| Net loss attributable to Neonode | $1.010 million | $0.573 million | Loss increased |
| Basic and diluted loss per share | $0.11 | $0.07 | Loss per share increased |
| Cash used in operating activities | $0.969 million | $0.460 million | Cash use increased |
HMI Solutions revenue was $1.182 million, down 39.1%; HMI Products revenue was $112,000, up 60%. HMI Solutions accounted for 91% of Q1 2020 revenue. Management attributed the overall revenue decline mainly to lower printer license revenue from HP, Epson, and Amazon and lower estimates for unbilled license fees, partly offset by higher module sales and engineering revenue.
Research and development expense declined to $995,000 from $1.259 million; sales and marketing expense rose to $545,000 from $449,000; general and administrative expense decreased to $799,000 from $871,000. Interest expense was $7,000 and income-tax provision was $16,000.
Balance sheet, liquidity, and obligations
- Cash was $1.187 million at March 31, 2020, down from $2.357 million at year-end. Working capital was approximately $1.441 million, versus $2.411 million at year-end; current assets were $3.997 million and current liabilities $2.556 million.
- Total assets were $5.600 million and total liabilities $2.952 million. Total stockholders’ equity was $2.648 million, including a $2.648 million deficit in noncontrolling interests. Accumulated deficit was $191.530 million.
- Finance lease obligations totaled $880,000, including $520,000 current; operating lease obligations totaled $276,000. The filing reports no conventional borrowings in the presented balance sheet.
- Operating cash use of $969,000, investing cash use of $5,000, financing cash use of $132,000, and a $64,000 adverse exchange-rate effect resulted in a $1.170 million net decrease in cash.
Management reported recurring losses and negative operating cash flows, but stated that its operating plan and potential capital sources were expected to alleviate going-concern concerns. The filing gives no quantified cash runway. It cautioned that additional financing may be needed if operations do not become cash-flow positive; financing may be unavailable or dilute shareholders or impose restrictive debt terms.
Material changes, outlook, and risks
- COVID-19 was already adversely affecting near-term growth and business, with further impact expected. Neonode cited possible customer-demand weakness, component-delivery challenges, and risks to timely and cost-effective product delivery. The ultimate financial impact was uncertain and could be material.
- The company introduced Swedish government-backed short-term layoffs that reduced staff working hours by 20%, alongside other cost-reduction measures. It noted that mitigation may not succeed.
- Management expects revenue from its three business areas to help reduce operating losses in coming years and intends to improve operational efficiency, but provided no numerical guidance and gave no assurance of achieving targets. It also anticipated expanding HMI sales and marketing activity.
- AirBar inventory had a $0.8 million reserve at both March 31, 2020 and year-end, reflecting low sell-through. A $210,000 bank guarantee for AirBar-related inventory remained in place through December 31, 2020. Management had recorded no liability for it as of quarter-end, expecting to sell remaining AirBars during 2020.
- Revenue was concentrated: HP accounted for 36% of Q1 revenue, Alpine 19%, and Epson 17%. Four customers represented approximately 80% of accounts receivable and unbilled revenue at quarter-end.
- Foreign currency translation reduced other comprehensive income by $87,000. The company also identified foreign exchange exposure and risks from customer product-release timing, suppliers, royalty verification, competition, intellectual property, and access to capital.
- No material legal proceedings were reported. A director resigned on May 10, 2020. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification priorities
- Assess the pace of cash consumption against the $1.187 million quarter-end cash balance, lease payments, and the absence of a quantified runway.
- Track recovery or further declines in licensing revenue, particularly printer-related royalties, and verify assumptions behind unbilled license-fee estimates.
- Monitor COVID-19 effects on customers, component availability, deliveries, and the expected benefit of the 20% staff-hours reduction.
- Review AirBar sell-through, the $0.8 million inventory reserve, and the $210,000 bank guarantee and related purchase commitments.
- Consider customer concentration and potential financing needs, including possible equity dilution or debt restrictions.
- Check the filing’s comparative weighted-average share count: the statements of operations show 8.800 million for Q1 2019, while the net-loss-per-share note shows 8.880 million.